Should students pick majors based on post-grad unemployment rates and earnings?

Wednesday

Jul 3, 2013 at 6:00 AM

By Peter S. Cohan WALL & MAIN

“Hard Times: College Majors, Unemployment, and Earnings,” a May 2013 study by Georgetown University, finds wide variations in the unemployment rates and earnings of students – depending on the subjects in which they major. While the findings are interesting, they are of limited value to students -- and their parents who often foot the bill -- in deciding what major a student ought to pick.

Hard Times uses survey data from the American Community Survey for the years 2010 and 2011 to calculate unemployment rates and annual earnings for students at three levels of education and experience – after graduating from college, a bachelor’s degree plus work experience, and after earning a graduate degree in the field.

The unemployment rates for experienced college graduates range from 2.6 percent for industrial arts and health to 9.3 percent for architects. So should students and their parents make a bee-line for industrial arts and health majors? No.

For one thing, there does not appear to be any relationship between unemployment rates and annual earnings. That’s because the lowest paying field is not architecture (the typical experienced architect with a BA makes $65,000 a year) -- but education (average annual salary of $44,000) with an unemployment rate of 4 percent.

Nor does health or industrial arts pay the highest salaries – experienced graduates in those fields make $65,000 and $71,000, respectively. Instead, the highest paying field is engineering – with average earnings of $83,000 – despite a relatively high 4.4 percent unemployment rate.

But should average annual earnings be the yardstick for picking majors? The answer depends on a student’s values, interests and abilities. Before getting into how those three criteria might be used to decide on a major, it’s worth pointing out that as a college teacher, I have many conversations with juniors and seniors trying to get jobs.

Students ask for my help to get them into a consulting firm. But often, after inquiring about their skills and interests, I find that they are not really serious about consulting – many are tourists. By that I mean that only the rare student has the top grades and test scores required to get an interview with most large consulting firms. And all but a few students are attracted to the actual work that consultants do -- the majority want consulting’s high salaries.

This leads me to conclude that students need to take a look inside themselves when deciding on a major. They need to ask themselves: What do I enjoy doing? What am I good at? What kinds of financial and lifestyle goals do I have for my life? Which career options will enable me to achieve those goals? My hypothesis is that students will be best off by picking a field they enjoy and in which they excel -- and which will help them achieve their goals.

If you look at education as an investment – about $230,000 for four years of private college – then you should calculate whether that investment will pay off. Most people do not even try to make this calculation – they just assume that they need to get the best education they can and this enables the most prestigious schools to raise their room and board much faster than the rate of inflation.

For example, in the decade ending 2012, Swarthmore College’s annual tuition and other fees spiked 55 percent to $55,750 – an annual price increase of 4.4 percent – more than twice the rate of inflation.

In theory, the return on that $230,000 investment could be calculated as the additional amount of earnings that a person would generate compared to their income without a college degree. And you could compare that difference in income with the stream of income that a student would receive if the parent gave the student the $230,000 to invest and charge her with making up the difference through a good choice of investment.

When I did that calculation, I concluded that a college education pays. For example, in 2010, the median earnings for young adults with a bachelor's degree was $45,000, while the median for those with a high school diploma was $29,900.

If the student took that $230,000 and invested the funds, she would need to earn a 6.6 percent annual rate of return on that investment to offset her $15,100 high-school-diploma-holding lower income.

If the student happened to have received that lump sum in 2009, it would have been easy for her to have earned that 6.6 percent return – which is about equal to the long-term average rate of return on stocks. That’s because in the last four years, the average stock has risen at 21 percent. So, the student could have made up the $15,100 annual income and contributed the remaining $33,200 to her retirement account.

But this strategy is not sustainable because over the long run that 21 percent rate of return is way above the long-term average. And the lifetime earnings differences between high school students and better educated ones are therefore going to be very hard to make up through investment.

A 2011 Georgetown study found that people with a bachelor’s degree make 84 percent more over a lifetime than high school graduates. And on average, college graduates earn $2.3 million over their lifetimes compared to $1.3 million for those with a high school diploma.

Based on these numbers, the lifetime earnings of a college graduate are $1 million higher than those the high school grad – so the college tuition pays off four times over. And it’s not a stretch to conclude that the higher your annual earnings, the more times the college tuition pays off.

In short, students should major in engineering only if they love the field and they excel at it. Otherwise, they should pick the highest paying major that fits their passion and relative abilities.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.